Supply management (Canada)

Canada's supply management (), abbreviated SM, is a national agricultural policy framework used across the country, which controls the supply of dairy, poultry and eggs through production and import controls and pricing mechanisms. The supply management system was authorized by the 1972 ''Farm Products Agencies Act'', which established the two national agencies that oversee the system. The Agriculture and Agri-Food Canada federal department is responsible for both the Canadian Dairy Commission and its analogue for eggs, chicken and turkey products, the Farm Products Council of Canada. Five national supply management organizations, the SM-5 Organizations — Egg Farmers of Canada (EFC), Turkey Farmers of Canada (TFC), Chicken Farmers of Canada (CFC), the Canadian Hatching Egg Producers (CHEP) and the Ottawa-based Canadian Dairy Commission (CDC), a Crown corporation — in collaboration with provincial and national governing agencies, organizations and committees, administer the supply management system.

In the dairy industry, the supply management system implements the federated provincial policy through the Canadian Milk Supply Management Committee (CMSMC), CDC, three regional milk pools — Newfoundland's, the five eastern provinces (P5) and the four western provinces — and provincial milk marketing boards. Since 1970, the CMSMC has set the yearly national industrial raw milk production quota or Market Sharing Quota (MSQ) and the MSQ share for each province to ensure Canada to match production with domestic need and to remain self-sufficient in milk fat. Each province allocates MSQs to individual dairy farmers. In 2017, there were 16,351 dairy, poultry and eggs farms under supply management. 2016 Canadian Census of Agriculture

While many federal and provincial politicians from major parties "have long maintained support for a supply-managed system for dairy, poultry and egg farmers", there has been ongoing debate about SM. Proponents of the framework tend to claim that it is designed to ensure that these farms can be profitable and Canadian consumers have access to a "high-quality, secure" supply of what they claim to be "sensitive products" at stable prices without shortages and surpluses. Opponents of the system tend to view it as an attempt by members of the supply managed industries to form a publicly supported "cartel" and profit at the expense of purchasers. Supply management's supporters say that the system offers stability for producers, processors, service providers and retailers. The controls provided by supply management have allowed the federal and provincial governments to avoid subsidizing the sectors directly, in contrast to general practice in the European Union and the United States. Detractors have criticized tariff-rate import quotas, price-control and supply-control mechanisms used by provincial and national governing agencies, organizations and committees. Canada's trade partners posit that SM limits market access.

The Organisation for Economic Co-operation and Development (OECD) maintained in 2017 that Canada's "export growth would be boosted if Canada phased out its Canadian dairy supply management policies". Supply management was one of many issues in Comprehensive Economic and Trade Agreement (CETA), a free-trade agreement between Canada, the European Union and its member states and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) negotiations and the United States Mexico Canada Agreement (USMCA). Under the October 1, 2018, United States Mexico Canada Agreement, the supply management system remained fundamentally intact however some modifications to the milk class system have weakened supply management.

Mandate

Canada's supply management system, which encompasses "five types of products: dairy, chicken and turkey products, table eggs, and broiler hatching eggs," "coordinates production and demand while controlling imports as a means of setting stable prices for both farmers and consumers." The dairy supply management system is administered by the federal government through the Ottawa-based Canadian Dairy Commission (CDC) a Crown corporation. The Agriculture and Agri-Food Canada federal department is responsible for both the Canadian Dairy Commission and its analogue for eggs, chicken and turkey products, the Farm Products Council of Canada.

Supply-managed sectors

In total, there are about 12,000 dairy farms, 2,800 chicken farmers, 1,000 regulated egg farmers who produce table eggs and broiler hatching eggs, and 551 turkey farmers, that operate under supply management. According to the 2016 Canadian Census of Agriculture, there are 193,492 farms in Canada; about 12 per cent of Canadian farms are under supply management.

Regulatory framework

There are five national organizations, known jointly as the SM-5 Organizations, that administer or support agricultural supply management systems. According to a CBC article, "The SM-5 Organizations say federal-provincial agreements for each of the supply-managed sectors weave together the legislative jurisdiction of both levels of government to 'ensure a seamless regulatory scheme'... "designed to enable farmers to get a reasonable return while stabilizing the supply of agricultural products to Canadian consumers."

The supply management system was authorized in 1972 through the Farm Products Agencies Act and subsequently the national agencies that established the system were created. The Canadian Milk Supply Management Committee, which is chaired by CDC is "responsible for the administration of supply management for the dairy industry". By 1983 all provinces except Newfoundland had signed the National Milk Marketing Plan (NMMP) which replaced the 1971 Interim Comprehensive Milk Marketing Plan. The goal of the NMMP agreement was to manage the supply of raw industrial milk to meet Canadian needs, to establish provincial MSQs and to raise fees to remove surplus.

In 1972, the national marketing agency to administer the supply management system for eggs, Egg Farmers of Canada (EFC), was established. In 1974 one was set up for turkey farmers, Turkey Farmers of Canada (TFC), and the chicken marketing agency, Chicken Farmers of Canada (CFC), was created in 1978, and the Canadian Hatching Egg Producers (CHEP) agency was established in 1986.

The National Farm Products Marketing Council, now the Farm Products Council of Canada, established by the 1972 Farm Products Agencies Act, oversees the national supply management system agencies for eggs, chicken, and turkey.

The Farm Products Council of Canada "oversees the various agencies in an effort to promote an efficient and competitive agricultural sector while ensuring that the marketing system operates well, in the interests of producers and consumers."

In Ontario, for example, the 2017 Agricultural Products Marketing Act (FPMA) "allows the Minister of Agriculture and Food to enter into contracts with the federal government to have national marketing agencies perform marketing functions within Ontario on behalf of the Ontario government" through the Ontario Farm Products Marketing Commission.

Milk supply-management

The milk supply management system is a "federated provincial policy" with four governing agencies, organizations and committees—Canadian Dairy Commission, Canadian Milk Supply Management Committee (CMSMC), regional milk pools, and provincial milk marketing boards.

Canadian Dairy Commission (CDC)

The Ottawa-based Canadian Dairy Commission (CDC) composed mostly of dairy farmers, was created in 1966. The federal government is involved in SM through the CDC in the administration of imports and exports. The CDC establishes "support prices for butter and skim milk powder (SMP) and operates surplus removals at the support prices, removing butterfat and SMP from the market for export or later sale. It also facilitates the process for the setting of Market Sharing Quota (MSQ) for industrial milk nationally." According to the CDC website, it operates as an agency supporting "farmers, processors and consumers." CDC, under CEO Serge Riendeau—a former farmer, dairy producer and Agropur Cooperative Director—also "manages programs that target the industry, upholds milk quality standards and supports Canadians working in the dairy industry". Riendeau is responsible for "cooperating and negotiating with dairy industry stakeholders to reconcile their interests and maintain compliance with the supply management system". Riendeau, who was a farmer and dairy producer before becoming President of Agropur Cooperative in 1992, advocates for the "supply management system" and "was instrumental in the establishment of a national strategy to promote the use of Canadian dairy ingredients."

The Canadian Milk Supply Management Committee (CMSMC)

In 1970, the Canadian Milk Supply Management Committee (CMSMC), was established to set the national industrial milk Market Sharing Quota (MSQ) which is then allocated among the provinces. The national MSQs "ensure that Canada is self-sufficient in milk fat."

The CMSMC, which is chaired by the Ottawa-based Canadian Dairy Commission (CDC), administers SM for the dairy sector with the CDC performing a role of supervision, support and regulation.

Regional milk pools

There are three regional milk pools—Newfoundland's, the Eastern Canadian Milk Pooling P5 Agreement which includes Prince Edward Island, Nova Scotia, New Brunswick, Québec and Ontario and the Western Milk Pooling Agreement (WMP) which includes Manitoba, Saskatchewan, Alberta and British Columbia, that operate under the supervision of the CDC. They pool milk sale revenues, costs and markets, and harmonize pricing and establish daily quotas.

Under GATT's Article XI supply management enjoyed an exemption. When Article XI was lost during the Uruguay round of negotiations (1986-1993), tariffs were introduced to protect Canada's domestic dairy. The loss of Article XI was one of the driving forces behind the formation of a milk pooling agreement. When the WTO replaced GATT in 1995, it was recognized by Canada's Dairy Industry Advisory Committee that expanded regional milk pools would be needed to adapt to changes.

Provincial marketing boards

Dairy producers must hold a quota or permit to sell their products to a processing plant. These quotas, or Market Sharing Quota (MSQ), avoid overproduction. In the SM system, provincial marketing boards, allocate production quotas or MSQs on milk for example, based on regional milk pools recommendations which include daily milk quotas.

The provincial milk marketing boards are responsible for most of the regulation of milk marketing, organization of dairy producers, quota administration and transfers, and producer-processor settlement. Individual provinces regulate their own marketing systems with marketing boards that may engage in product promotion, collective sales, and price negotiation. Marketing boards have regulatory control over the feeding, treatment, and conditions of animals on farms, as the board is in direct control of the quota allotted and can directly sanction farms who violate board policy. In Ontario the FPMA authorizes the province to control and regulate the production and marketing of Ontario farm products xcept dairy productsincluding their prohibition. The Dairy Farmers of Ontario regulate the dairy marketing system.

During the 2015 TPP negotiations, as the United States, New Zealand and Australia called for an end to SM, the role of the provincial marketing boards was challenged. By October 2015, however, it was agreed that in exchange for an opening the market to other countries, marketing boards could continue to perform their decision-making role in production quotas and farm gate prices.

Background

A 2001 "NAFTA - Report Card on Agriculture", traces the history of trade disputes to the 1930s. After the United States enacted the Smoot–Hawley Tariff Act in 1930, US tariffs rose to record levels. This devastated the Canadian economy and resulted in implementation of protectionism at a global level. By 1932, Canadian exports dropped from $515 million to $235 million. Canada, the United States, and many other countries erected "high and discriminatory barriers" in the pursuit of "beggar-thy-neighbor" policies.Cox, Tom L., Le Roy, Danny G., Goddard, and Ellen W. (2001)
“Dairy Disputes in North America: a Case Study
” NAFTA – Report Card on Agriculture. AgCon Research in Agricultural & Applied Economics. The signing of the first liberal trade agreement, the 1936 Canada–US agreement, by President Franklin D. Roosevelt and Prime Minister Mackenzie King represented the start of an economic relationship between the two countries that resulted in the steady decline of trade barriers such as tariffs.

Post-WWII, following the collapse of world trade, negotiators of multilateral trade agreements, including advocates of free trade and protectionism, carved out the General Agreement on Tariffs and Trade (GATT), first signed by 23 countries in 1947. Under GATT, "imposing import controls on commodities subject to supply management asa valid and recognized practice. Such controls prevent dthe displacement of significant quantities of Canadian dairy products on the Canadian market, and thus protect d anadianproducers against losses incurred through having to export all production in excess of domestic demand.

In the 1950s and 1960s there was volatility in dairy prices, dairy producers had more bargaining power relative to dairy farmers, and the United Kingdom was poised to enter the European Common Market, resulting in the loss of Canada's largest dairy export customer. As low milk prices continued into the 1960s, the Canadian Dairy Commission Act was passed in 1967, establishing the Canadian Dairy Commission (CDC). The CDC's mandate was to ensure producers received a fair return on investment, and to ensure the quality and supply of milk.

Through the 1958 federal Agricultural Stabilization Act (ASA), an agricultural commodity could be designated by the ASA for direct deficiency payments if the price dropped 80% below the price averaged over the preceding decade. This was the first act of its kind in Canada and a majority of ASA cash subsidies to farmers went to the dairy industry for industrial milk—milk used in making cheese, milk powder and butter.

Supply management in its current form dates from federal legislation passed in December 1971 under the Pierre Elliot Trudeau government. Trudeau had expressed support for the system since 1949 when he was as an assistant to Robert Gordon Robertson.

The Canadian Milk Supply Management Committee (CMSMC) was first introduced in 1970 as the body responsible for setting the national Market Sharing Quota (MSQ). By 1974, every province except Newfoundland had signed on. The dairy industry was the first in Canada to be operated through the national supply management system. Following dairy, a national supply management system was implemented for eggs in 1972, turkey in 1974, chicken in 1978 and chicken hatching eggs in 1986. The national agencies for eggs, turkeys, and chickens were also established in the 1970s.

When the European Economic Community (EEC) adopted Canada's model in introducing its own quotas in April 1984, they were motivated by a milk supply surplus. In Canada, where there was no milk surplus in the 1970s—the MSQs were designed to "guarantee a fair level of return for producers and to promote a stable supply of high-quality dairy products for consumers."

In 1981, American economist Thomas Borcherding published his 117-page report entitled "The Egg Marketing Board" for the Fraser Institute in which he used the phrase, the "egg marketing cartel". In the same year, based on his report, he also wrote several 1981 articles and editorials in '' The Globe and Mail'' about the artificially high-prices of eggs in Canada allegedly caused by a supply management mechanism, egg marketing boards, which Borcherding called an "egg marketing cartel". According to Simon Fraser University professor ''emeritus'', Donald Gutstein in his 2014 publication '' Harperism'', this marked the beginning of an aggressive campaign by the Fraser Institute and other think tanks, that he described as neo-liberal, to eliminate supply management in the ensuing decades.In '' Harperism'' (2014), Gutstein groups think tanks, such as the Fraser Institute, C.D. Howe, Atlantic Institute for Market Studies (AIMS), the Montreal Economic Institute (MEI), Frontier Centre for Public Policy, and the School of Public Policy, University of Calgary as a pro-economic freedom, neo-liberal think tanks who focus on eliminating supply management because they say it is market distorting.

The historic Canada-U.S. Free Trade Agreement (CUSFTA) came into force on January 1, 1989. CUSTFA, which built on GATT rights and obligations, was the largest trade agreement concluded between two countries up to that time.

When the North American Free Trade Agreement (NAFTA) came into force on January 1, 1994, the Canadian dairy system was not part of negotiations.

Following the establishment of the World Trade Organization (WTO) in 1995, when Canada was forced to remove some of its export subsidies, dairy farmers underwent a major consolidation. The federal government and the CDC created the a new more stringent pricing system which was still in place in 2018. The four sectors in 1995 were grains and oilseeds with 90,000 farmers, beef and hog farmers with 75,000 farmers, supply-managed dairy, poultry and egg sectors with 30,000 farmers, and horticulture with 9000 farmers.

Canada participated in the WTO Doha Development Round (DDA) of trade-negotiations that began in 2001 with the objective of facilitating global trade by lowering trade barriers. By 2004, whereas previously, Canada's supply management system had some support from other countries, in Geneva, the system was under attack. "In terms of supply management, and in the case of the Wheat Board...we were under attack. It was one against 146. We had absolutely no allies at the negotiating table."

A WTO panel ruled in 2002 that Canada "breached its trade obligations through its dairy support, siding with the United States. The result of the WTO ruling is that Canada is not allowed to export much dairy."

In 2005, "MPs voted unanimously in favour of a motion reiterating" their support for supply management. All the parties say it is "necessary so farmers can earn a decent living." Liberals published a press release to tell Conservatives that they "must protect supply management." "Canadian politicians have long maintained support for a supply-managed system for dairy, poultry and egg farmers."

In December 2006, in an interview with the ''Western Producer'', Trade Minister David Emerson under Conservative Prime Minister Stephen Harper predicted that the SM would limit Canada's trading ability and in the end Canada would lose in trade negotiations. In March 2007, Emerson walked back his statement, and reiterated the Harper administration's support for supply management.

In the 2008 OECD policy brief, "Economic survey of Canada 2008: Modernising Canada's agricultural policies", was highly critical of supply managed sectors especially dairy farming.

A November 2009 report by the Standing Committee on International Trade (CIIT), in preparation for TPP talks, recommended that "the Government of Canada affirm its unequivocal support of, and commitment to defend, Canada's supply management system." The House of Commons "unanimously passed a resolution instructing Canadian negotiators to defend supply management". This "unanimous support for supply management among Canada’s main political parties" was explained in part by the fact that supply-managed sectors employed 232,000 across Canada and contributed "over $13 billion to GDP annually.

In April 2010, the ''Globe and Mail'' reported that Canada was denied a seat at the TPP negotiating table because New Zealand opposed Canada's "official position in support of supply managed poultry, egg and dairy sectors." In 2010, it was expected that in the TPP negotiations, agriculture would be the "game-changer affecting hundreds of thousands of farmers particularly in Canada, particularly in the supply-managed sectors."

Against the backdrop of the TPP talks, a series of articles were published that were "highly critical of milk supply management" and supporters of supply management responded with counter-arguments. David E. Bond, the retired chief economist of HSBC Bank Canada, published an opinion piece in the ''Globe and Mail''Bond wrote that, "The federal government imposes tariffs that run between 200 per cent and 300 per cent on virtually all dairy imports, even from those nations with which we have free-trade agreements." He concluded that, "It is the largest agricultural subsidy given to Québec, and therefore politically untouchable." The highest tariff Bond cited, 300% TRQ on butter, is actually never applied as Canada does not import butter above the TRQ threshold. stating that the "government sanctioned" National Dairy Policy resulted in a "wealth transfer of more than $2.4-billion annually from consumers and food processors to dairy farmers. That's more than $175,000 for each dairy farmer." Ed Mussell of the George Morris Centre and Maurice Doyon, a professor in the Department of Agricultural Economics and Consumer Science at Laval University described the series of articles and their counter-arguments from supporters of supply management, as "a great deal of rhetoric, simplistic arguments and invalid and untested assumptions".

Debate

Sylvain Charlebois from Dalhousie University, a well-known critic of supply management, has argued since 1998 that the system needs to be reformed. He has published numerous studies on the issue, suggesting the system would need to make sectors more competitive, and open to international trades. However, in an August 2018 CBC interview, Charlebois cautioned that it would be "too dangerous" to abolish the SM system now: Canadian farms are not competitive. As well, the multibillion-dollar quotas held by thousands of individual farmers, have been used as collateral to take out government loans and invest in farm improvements. He called for a debate on an SM phase out instead.

Martha Hall Findlay ran for the Liberal Party leadership of the Liberal Party in the 2013 race, on a "mostly one-issue campaign", abolishing supply management. According to ''The Washington Post'', "her taboo-breaking crusade inspired a deluge of favorable (sic) editorials that helped make supply management — the Canadian jargon for dairy protectionism — a household phrase." Hall Findlay's widely cited June 2012 paper, uploaded to the School of Public Policy, University of Calgary site, where she was an Executive Fellow, called for an end to Canada's supply management system. Hall Findlay published a number of articles based on her report in ''Maclean's''. At the same time, other right wing think tanks, such as the Macdonald-Laurier Institute and the Fraser Institute, released their studies on the negative effect supply management had on the Canadian economy.

In his 2014 paper published by Centre for International Governance Innovation (CIGI), University of Waterloo by Bruce Muirhead, an historian and Egg Farmers of Canada Chair in Public Policy, and cited in the Library of Parliament, "supply management benefits all Canadians." Muirhead wrote, "To lose it, however, would be a tragedy — it has served dairy farmers, consumers and processors well over the years, providing cost-effective, safe and secure dairy products in a world where those realities are increasingly difficult to guarantee".

In March 2015 University of Manitoba'' (CPP) journal entitled "Milked and Feathered: The Regressive Welfare Effects of Canada’s Supply Management". They concluded that supply management was regressive and placed a greater burden on lowest income households with children, representing up to $592 more annually for dairy and poultry based on Statistics Canada data from 2001.Catalogue number 62-554-XIE Their award-winning article generated much media attention. In June 2016, Cardwell and Lawley received the Canadian Economics Association's John Vanderkamp Prize for best CPP 2016 article.

By October 2015, as part of its commitment under the Trans-Pacific Partnership (TPP), Canada, under the Harper administration, had agreed to cut back both dairy tariffs and import quotas.Thus, the only reason import restrictions on dairy products are even an issue is because the U.S. withdrew from the TPP. In return Canada kept its SM policies in place with provincial marketing boards still deciding the farm gate price of milk and production quotas, but with some adjustments for opening up the Canadian dairy market by 3.25%. The U.S. had asked for 10%. When the U.S. under the Trump administration withdrew from TPP on January 24, 2017, the tariff-rate quotas (TRQ) on dairy products remained in effect. No U.S. exports ever pay the 200 to over 300% TRQs because US dairy products are never imported to Canada outside the TRQ.

In April 2017, President Trump, while visiting Wisconsin, said he would "stand up for our dairy farmers" against Canada's "unfair” practices" without specifying which "parts of Canada’s tariff-protected dairy sector he wanted to change, nor what measures rumpwould take to make it happen". As a result, Australia and New Zealand "re-ignited" their calls for a "fresh complaint to the world trade organization. It evolved into the end of such surplus sales and called for the dismantling of the supply-management system within 10 years, or, at least concessions, to allow greater market access for their country’s products.

Following his June 3, 2018 interview on NBC's ''Meet the Press'' with Chuck Todd, in which Prime Minister Trudeau clarified Canada's position on newly imposed tariffs, the Dairy Farmers of Canada (DFC) wrote Trudeau to advise against concluding an agreement that would "negatively impact the dairy farming community." Trudeau has mentioned that the US "want a better deal on their auto sector from Mexico, and I think they want more access on certain agriculture products like dairy to Canada. We--We're moving towards, you know, flexibility in those areas that I thought was very, very promising."

On June 13, against the backdrop of NAFTA re-negotiations, Andrew Scheer, the leader of the opposition—the Conservative Party of Canada—removed Maxime Bernier, MP for Beauce, from his shadow cabinet, allegedly for his party disloyalty for his April 2018 online publication of a chapter from his postponed book ''Doing Politics Differently: My Vision for Canada''. In the chapter, "Live or die with supply management", Bernier explained why ending supply management was one of his major campaign issues when he ran unsuccessfully in 2016-2017 for leadership of the Conservative Party. In January 2017, a Québécois farmer, Jacques Roy, created a Facebook group, "Les amis de la Gestion de L'offre et des Régions" (Friends of Supply Management and Rural Communities) with Martin Nichols, to promote the "selection of a pro-supply management Conservative Party leader" in the 2017 CPC race. They became CPC members and encouraged others to join. By July 2017, the group had about 10,000 members. Bernier wrote that the group, which he said, supported Andrew Scheer as CPC leader, had joined the CPC party just before the election were "fake Conservatives".

Bernier said that he was dismissed from the cabinet because of his view of SM. On June 12, during Question Period, Liberal ministers, Diane Lebouthillier and Chrystia Freeland, had said that Bernier was clear proof that Conservatives would not defend it.

In a June 15, 2018 press statement, U.S. Agriculture Secretary Sonny Perdue at Lawrence MacAulay's family farm, Perdue said that he was not attempting to convince Canada to abolish the SM system. He said, "We all have our interests and Canada has an embedded supply management system in their dairy industry, and it's not our desire to do away with that, just to regulate it in a way that does not depress world prices."via The Canadian Press Back in Wisconsin, Perdue clarified that while the U.S. should not request that Canada eliminate SM, it would be difficult to reach a NAFTA agreement with Class 7 in place.

By July 2018, with Canada and the U.S. "locked in an unprecedented, cross-border trade fight", President Trump said that he would not commit to any new NAFTA agreement until after the 2018 midterm elections. Trump "has frequently attacked Canadian trade barriers on agriculture — dairy products in particular — as unfairly hurting American farmers...Trudeau has insisted the U.S. president's complaints about Canada's trade barriers are the result of Canada's refusal to give in to Trump's demands to do away with the country's supply-management system, which is designed to protect dairy, poultry and egg producers." However, a "vocal contingent" of American dairy farmers support the Canadian supply and management system. In March 2018, both the Wisconsin Farmers Union (WFU) and Dairy Farmers of America (DFA) were looking at Canada's supply management system to resolve their own problems of low prices resulting in farm failures.

In 2017, the federal government established a five-year $250 million Dairy Farm Investment Program (DFIP), to lessen the impacts of CETA's implementation on dairy farmers. The first round of funds were distributed to eligible licensed dairy farms in 2018. Each applicant is eligible for up to $250,000 in DFIP funds over the five-year period to upgrade milk production equipment.

After the Conservative convention in August 2018, Scheer denied an allegation that the Dairy Farmers of Canada worked with his office to block a motion changing the party stance on supply management after a binder from the Dairy Farmers of Canada was found by a delegate.

Policy

The national supply management system has three basic pillars: production control, pricing mechanism, and import control.
The five sectors operate in a similar way, even though they operate under separate provincial marketing boards and national organizations. This study was funded by La Coop Fédérée in partnership with Exceldor coopérative Burnbrae Farms Limited / Fermes Burnbrae Ltée Nutrigroupe and the collaboration of Fédération des producteurs d’œufs du Québec, Les Éleveurs de volailles du Québec, and Producteurs d’œufs d’incubation du Québec All five systems have the following elements in common. A quota system controls production volume, through the Market Sharing Quota (MSQ), for example. Through tariff-rate quotas (TRQs), the volume of imported product is limited. Pricing mechanisms that control the farm gate price that producers receive based on cost of production, are coordinated through provincial marketing boards and national organizations.

Production Control

National agencies, such as the Egg Farmers of Canada (EFC), Turkey Farmers of Canada (CFC), Chicken Farmers of Canada (CFC), Canadian Hatching Egg Producers (CHEP), and the Canadian Dairy Commission (CDC), are mandated to "prevent surpluses and shortages that can cause significant price fluctuations" by "setting the national production level based on provincial demand." Under the authority of the Farm Products Agencies Act the individual national agencies can "restrict production", "set provincial production quotas" and "impose penalties for overproduction or underproduction". It is the role of each provincial board to set "minimum quotas and quota transfer rules", to negotiate prices with buyers, for example, the three major processors, Parmalat, Saputo Inc and Agropur, and to allocate production among farmers. If farmers fail to produce within their "allotted quota" they may face penalties.

Market Sharing Quota (MSQ)

A permit to sell under supply management caps is called a Market Sharing Quota (MSQ). By 2001, all Canadian provinces were signatories to the National Milk Marketing Plan (NMMP) which fixes a yearly production quota for industrial raw milk across Canada and each province's share of the Market Sharing Quota (MSQ). In some provinces, fluid milk quotas were managed separately by provincial marketing boards, while industrial raw milk was managed by CDC's MSQs. Most provinces roll fluid quota and MSQ into a single production quota, held by dairy producers. The production quota system was designed to prevent overproduction. Each province then allocates MSQs to individual dairy farmers according to provincial policies and based on pooling agreements. Since the 1970s the Canadian dairy industry SM system matches production with domestic market needs.

MSQs can be inherited for free or sold, subject to regulations from the respective board.

In Ontario, from 2000 to 2010, quota values increased to $25,000/kg of butterfat, a significant leap. This represents the quota or permit required for one dairy cow's production and therefore represents the right to keep a single dairy cow. By 2015, a MSQ was valued at $30,000. Due to the value of the quota, by 2015, most banks would loan Canadian dairy farmers up to $30,000 per cow, while banks in the USA (non-supply managed) will only loan $3,000 per cow. By 2018, the combined value of MSQs was $CDN35 billion. "Farmers use quota as collateral, and total farm debt across Canada amounts to $102 billion — nearly one-third of it lent through a federal agency." An average dairy farm of 70 cattle would hold quotas worth 2,100,000.

According to the annual Dairy Farm Accounting Project report, Ontario dairy farmers saw their net farm profit drop from Can$178,601 in 2012 to Can$90,114 in 2016, the lowest point since 2006. The June 2018 report, showed that the net farm income in 2017 was Can$128,230, the first increase since 2012. According to a 2008 OECD policy brief, the median gross income in 2007, before expenses, for a dairy farmer was Can$250,000 a year. In 2006, milk quota values on their balance sheets soared to over Can$26 billion" or about 2% of total GDP. OECD says that SM's very high milk quota created "barriers to entry for young producers." For farmers wishing to enter the market, the price of the quota can be up to 75% of start-up costs. This can leave farmers entering the industry with a heavy debt burden, or effectively exclude them from ever starting. A Conference Board of Canada report estimated the book value of dairy quota at about $3.6 to $4.7 billion. Speaking at a GrowCanada 2014 agricultural conference, Mulroney said "we should consider "a careful, innovative and generous phase-out of our supply managed programs for dairy and poultry.

Pricing mechanisms

To establish a "fair price", the CDC consults with "dairy producers, processors, further processors, restaurateurs and consumers" each fall, then completes an annual study to determine the support price for industrial raw milk. Along with the study, Commissioners also consider factors such as "arguments presented by various stakeholders, an evaluation of the processors' margin, and economic indicators such as the consumer price index". The support price is posted each December and effective in February of the following year.

Producers create the goods (milk, poultry or eggs), and sell them to either processors or consumers at farm gate prices. Farm gate prices are set by negotiations between the farmers and downstream processors and ratified by the Local Marketing Board (one for each Province or Territory). The farm gate price that the processors or consumer pay is the minimum legal price, but the farmer could negotiate a higher price with one or more of their customers.

End-use classifying price system

In 1993 multiple component pricing was implemented with dairy farmers were no longer paid based on volume of milk, they were paid based on butterfat, protein and other milk solids. In 1995 changes were made in to the Canadian Dairy Commission (CDC) Act to allow the CDC to operate revenue sharing milk pools resulting in a national harmonized milk classification system using end-use pricing.

Both the Canadian and American dairy industries apply end-use classified pricing systems. In Canada, for example, prices of raw industrial milk purchased by milk processors are based on end-use−fluid consumption, yogurt, ice cream, cottage cheese, butter, whole milk powder, skim milk and milk protein concentrates (MPCs). The highest price is for Class A or Class 1 for fluid consumption and the lowest price is for milk products in 'Special Milk Class 7', a new class Canada introduced in February/March 2017. By 2005, the United States had four classes and by 2016 Canada had five. In Canada industrial raw milk is sold to three major processors, Parmalat, Saputo Inc and Agropur. Class 1 included fluid liquid products; Class 2 included yogurt, ice cream, soft products; Class 3 included Cheese; Class 4 included butter, milk powders and Class 5 included exports under access, permits 5(d) subsidized exports. In April 2016, Ontario began to implement a new milk price (Class 6) and Manitoba did the same in August 2016.

By June 2015, skim milk processing plants hit their capacity in Ontario, Québec and the Maritimes. The Dairy Farmers of Nova Scotia, the producers' marketing board, that purchases pools of raw milk from farmers to sell to dairy milk processors, raised their milk quota in March 2015, in response to an "unprecedented" increase in demand for butter and cream. They were left with a surplus of skimmed milk.

Canada's supply management system attracted media attention in 2016, when the province of Ontario responded to the exponential increase of the imports of diafiltered milk (UV) from the United States. In April 2016, the Dairy Farmers of Ontario created a new class of milk designed to encourage processors to invest in new facilities in Canada. They adjusted prices for certain milk ingredients such as MPIs, to compete with U.S. proteins.

The Global Dairy Ingredients MarketGlobal Dairy Ingredients Market Dairy ingredients market include whey ingredients, milk powder, milk protein isolates (MPI), milk protein concentrates (MPCs), casein, caseinates, lactose, and others. is booming and expected to increase as these relatively new milk products, specifically milk protein isolates (MPIs), milk protein concentrates (MPCs), also known as ultrafiltered milk (UV) or diafiltered milk, entered the marketplace. MPC's are produced in facilities in the U.S. along the CA-US border. Compared with raw milk, MPIs are inexpensive and easier to ship and more efficient in cheese production. Because the technology was invented post-NAFTA, and because they were listed as proteins by Canada's border agency, not milk, at the Canadian border U.S. MPI were both tariff and quota free. The MPIs were a "cheap alternative to skim milk for Canadian processors such as Saputo Inc and Parmalat Canada Inc, who must meet federal standards for milk and protein content in cheese". By October 2008, the TRQ for MPIs was put in place and there was a very strong import demand in 2009. By 2010, MPIs were placed under Re-export Program (IREP). By 2011, the TRQs for MPCs were always filled and the demand for Re-export Program (IREP) was strong. Over a five-year period ending in January 2016, the quantity of U.S. milk protein isolates imports rose to 2,700 tonnes—an increase of ten times by volume, representing about $150 million a year.

In response to the new Class 6 introduced by Ontario in 2016, Agropur cancelled its MPIs (diafiltered milk) contracts with American facilities, such as Cayuga Milk Ingredients, who claimed they lost $30 million in exports. Cayuga, Wisconsin-based Grassland Dairy Products Inc and other US facilities in turn cancelled contracts with dozens of dairy farmers in Wisconsin and the New York. There are concerns that "thousands of Sfamily farms could be lost without access to Canada's processors' contracts. Politicians in affected states blamed Canada for the threats to dairy farms and asked for intervention from the Trump administration. In June 2016, federal Agriculture Minister Lawrence MacAulay responded to concerns from Canadian dairy farmers that US MPIs caused a "reduced demand for domestic milk."

Class 7

In March 2017, the Canadian dairy industry implemented a Canada-wide domestic policy, creating a lower-priced class of industrial milk, Class 7, as part of Canada's National Ingredient Strategy negotiated between Canadian processors and producers, to address the surplus of 'non-fat solids' which include milk ingredients such as whole milk powder, skim milk and milk protein concentrates (MPCs) as "fast-rising volumes of U.S. milk proteins not subject to high tariffs" flowed into Canada. Class 7 promotes the production of protein substances in Canada using Canadian milk and benefits the domestic cheese-manufacturing sector. According to the media outlets in October 2017, in the list of U.S. requests in the NAFTA negotiations, the phasing out of SM over a ten-year period and the elimination of the Class 7 mechanism, were included. In April 2018, a 68-member bi-partisan group of members of Congress wrote a letter to U.S. Trade Representative Robert Lighthizer calling for the removal of Class 7 and other Canadian dairy policies. In their July 2018 report, Canadian agrifood economists, Al Mussell and Douglas Hedley, explained how Canada's SM system, which was bound by a butterfat quota, would become bound by a skim quota because of the "structural surplus of skim" which threatens to overpower the SM system.

Ten dairy industry organisations, including the Dairy Companies Association of New Zealand (DCANZ) and other dairy industry leaders from the US, EU, Argentina, Australia, and Mexico, co-signed a letter to request that their governments intervene in ending Canada's "new and harmful" 'Special Milk Class 7' mechanism by potentially entering a complaint through the WTO's Dispute Settlement System (DSS), a process which could take several years to conclude.

In 2016, before Class 7 was introduced, Canada exported less than 24,000 tonnes of skim milk powder (SMP). Although the organizations expressed concerns that as Canada moves its surplus skim milk powder onto the global market at low prices in "significant" volumes, this could distort and depress global prices, Statistic Canada reported in 2017 that Canada exported 71,880 tonnes which is valued at Can$173 million (US$133 million) and represents an increase of 47,880 tonnes over 2016. The US exports "five times more dairy to Canada than vice-versa". Agri-Food Economic Systems' research lead, Al Mussell, said "concerns about Class 7 are overblown" as Canadian SMP sales are "a drop in the bucket." Even though there was an increase in SMP exports in 2017 and 2018, that "growth cannot continue because Canada’s system restricts production". The price of Class 7 SMP was about US$0.5488 a lb. in March 2017.

Retail price of milk

In April 2018 Export Action Global report, co-authored by Adam Taylor, who was a senior advisor for Ed Fast, Minister for International Trade (2011-2015) under Stephen Harper